The most important thing in life is not what you did in the past but what you do next. That is particularly important if you happen to be Bill Simon – the CEO of Walmart. According to him inflation is "going to be serious. We're seeing cost increases starting to come through at a pretty rapid rate." The business press and those who either cannot or will not see the fundamental flaw in their theories blame it on some vague economic theory that mysteriously causes inflation to occur (wasn't is just a few months ago that those same theorists had their underwear in a knot over looming deflation?). They blame cotton prices, oil and raw materials. Bill Simon knows better, however. He knows Walmart bet on the wrong horse and now they need to make a fundamental change in the plan – and I'll bet he doesn't know what the next best move is.
He bet on that pretty red horse – the Chinese one. And he knows the US economy is not facing a deflation problem – China's is. And Walmart is all in with China. "As wages and production costs rise, coastal factories are demanding higher prices for the goods they ship overseas. That means Americans, Europeans and other buyers will have to pay more for those goods or seek lower-cost suppliers elsewhere." According to a guy named Tao who works for a Hong Kong bank, "I hear that many Chinese exporters are rejecting orders from Wal-Mart and other Western retailers. I’ve been covering the Chinese economy for a long time, and I’ve never heard that before."
It isn't cotton and gas prices that have Mr. Simon fretting – it's that "many Chinese exporters are rejecting orders from Walmart" part. That coupled with knowing that NAPA CFO Jerry Nix is right when he says "customers are 'pushing back' on price increases."
So the China 'miracle' is coming unglued, as we have been predicting for a long time on Evolving Excellence. What is poor Bill to do?
He could take the ostrich approach – hope against logic that this is just an anomaly – that somehow things will be OK and Walmart's China-centric model will come through this intact … or just maybe if he plays the ostrich, perhaps all the competition will too – so everyone can raise prices together and force the US consumers to accept the cost of their bet on China.
He might bail out of China and continue the pursuit of cheap labor – take the whole Walmart show down to Ho Chi Minh City, the next stop of choice for the 'business by numbers' crowd. Things don't look a whole lot more promising there, however.
Or Mr Simon could finally figure out that an entirely different supply model is emerging – one based on lean thinking and based on a holistic view of costs, and one that understands the importance of time in the big economic picture. He could overhaul the Walmart sourcing strategy and pull it back to a regional focus – some combination of Mexico and the USA to support North American Walmart needs. That would be the wise choice … but we have yet to see if he is a wise leader.
Should be interesting to watch the thinking unfold at the world's largest retailer – at least the largest for now.
John Hunter says
I think inflation is going to be a big problem. I actually believe the Chinese economy is going to continue to be strong looking out 10-20 years. I am sure during that time there will be lots of very big ups and downs.
I do agree the outsourcing boom will decline. But I believe other aspects of the Chinese economy will continue to grow. China has made a great deal of money from USA and other companies outsourcing manufacturing to China. I do not think China is only a one trick pony though. We will see.
I own stock in Tesco, not Walmart. And Costco is what I look at for investing (over Walmart).
Paul Todd says
Those of us old enough to remember Walmart’s “Bring It Home to the USA” campaign will see the irony. In the mid-80s, Made In USA was a big part of the company’s sourcing and marketing. That quietly faded, then disappeared completely after Sam Walton’s death in 1992.
Incidentally, the CEO of Walmart is Michael Duke. Mr. Simon is the CEO of Walmart US.
Dave B says
Well, his Wal-mart biography indicates he’s got an MBA, so I’d expect him to make a short sighted, purely financially based decision…
Jim Fernandez says
No, no, no, there is a very simple solution. Open hundreds of Walmart stores in China. Then the Chinese will have to sell to Walmart. Then Walmart can ship the “extra” inventory to the US.
Besides, US companies are no longer seeking cheap labor overseas. And I have evidence of that:
HEADLINE: US Firms Cut 2.9 Million US Jobs While Adding 2.4 Million Overseas.
The Wall Street Journal (4/19, Wessel, Subscription Publication), in an article titled, “Big US Firms Shift Hiring Abroad: Work Forces Shrink at Home,” reports that in the last ten years, US multinationals have cut 2.9 million American jobs, while hiring 2.4 million outside the US. The Journal notes that GE CEO Jeffrey Immelt explains the trends by arguing, “We’ve globalized around markets, not cheap labor. The era of globalization around cheap labor is over. Today we go to Brazil, we go to China, we go to India, because that’s where the customers are.”
Bill Waddell says
I wonder if anyone pointed out to Immelt how dramatically his nose was growing while he said that, Jim
Greg says
Bill,
How does one develope a
“holistic view of costs, and one that understands the importance of time in the big economic picture” in an organization that has been mainly price driven”? Is there a simple and prescribed method for doing this?
Bill Waddell says
Greg,
If you go to my web site
http://www.bill-waddell.com/1dayprograms.html
and download the article on this page (the one with the pdf logo) it will be a good starting point.
Bill